Finacle adds to Infosys' pain

The banking, financial services and insurance sector, one of the largest verticals for Infosys Technologies, has been a drag on the company's fourth quarter results.

Also, it seems Finacle, the company's flagship banking product, is in trouble, too.

If the fourth-quarter results of the Bangalore-based company saw a drag, it was due to a dip in the BFSI segment. In fact, it declined 4.6 per cent sequentially.

A closer look at the firm's performance shows that all is not well in the products segment -- a majority of whose share comes from Finacle.

For the fourth quarter ended March 31, 2012, the contribution of products was 4.4 per cent, down from 4.8 per cent in the October-December 2011 quarter.

Also, it was down from 5.4 per cent in the quarter ended March 31, 2011.

The senior management of the company agreed that one of the biggest reasons for business to fall four per cent from the US was the pressure in the BFSI segment.

Finacle partly contributed to it.

"Finacle has seen a significant drop in terms of growth this quarter," notes Ashok Vemuri, head (Americas) and global head of manufacturing and engineering services. "But then it is products business, and it has fluctuations."

Substantiating his view, he points out that in North America, Finacle has a couple of clients that are getting into a steady status.

"But the unit has been growing well in Asia. We have to make inroads into the mature markets as well, but that will be a long-drawn process.

"Mature markets don't buy core banking products that much as emerging markets."

In the third quarter of FY12, the company had won four clients in the CBS implementation segment.

While the company does not give a break-up of the contribution of Finacle to the products segment, analysts point out that it will be a majority contributor.

"The company had stated a couple of quarters ago that retail banking is gaining traction, but that, too, seems to be going south," says an analyst of a leading brokerage firm.

"Moreover, some of the new products that the company introduced -- such as Retail 360 or its mobile applications offering -- have yet to pick up momentum. We expect that there will be some pressure on Finacle."

Though the company says the ramp-downs in the BFSI segment happened only in the last month of the January-March quarter, problems had begun cropping up earlier.

In September 2011, Union Bank of California had cancelled a banking project with Infosys. Add to this, the fact that two of its largest clients in the insurance vertical also have issues.

Core banking on a decline

By the company's own admission, implementation of core banking has been on a decline, especially in the mature markets.

"If you look at the switches that are happening from legacy systems to core banking in large banks, they are more so in international markets," notes B G Srinivas, head (Europe) and global head (financial services and insurance).

"The ones doing these changes in their home market are Tier-II

banks."

All the same, he says, it is difficult to predict the full year given the scenario.

"It is fair to assume that it will be in line with our overall guidance. Even so, it could change quickly if we have one or two big wins in Finacle."

Srinivas agrees it is a bit of an uncertain environment for banks to shift to a new platform.

He, however, believes opportunities existed in adjacent areas of the banking segment, such as treasury and e-banking.

"But this won't have a big volume impact. We will focus on CBS in Europe and will continue to invest."

The chief executive officer of a mid-cap IT firm that specialises in banking products says the CBS story is dead in developed markets.

"If you still want to play in these markets, you need to have presence in business analytics, warehousing, analytics etc where many of the services players do not have any presence," he notes.

"Finacle has been losing market share due to these reasons."

But industry experts point out that firms which are not serious contenders in the banking products space would increasingly find it difficult, as banks are preferring to invest in implementations like e-banking and CRM.

Though Finacle also offers solutions in segments like treasury, wealth management and Islamic banking, the numbers do not show an equivalent growth when compared to peers in this segment.

Take, for instance, Oracle Financial Services (formerly known as iFlex). For the quarter ended December 31, 2011, the products category (including product licences and related activities) grew 30 per cent on a year-on-year basis.

Sequentially, it was up 15 per cent to Rs 604 crore (Rs 6.04 billion).

Increasing competition

A recent study by research firm Celent points out that with North American and Western European institutions already having core systems in place, most spending comes from Asia Pacific, Latin America and Eastern Europe, the Middle East and Africa.

Adding to the woes of the Indian players is the dominance of certain US and European players in the banking products space.

Because of the US regulatory environment, the North American market is dominated by local technology vendors FIS and Fiserv, with Jack Henry & Associates picking up business among smaller banks, according to the Celent report.

In Europe, the dominant players include, Temenos, Misys, FIS and ERI.

Though Finacle has been able to make inroads in the Asian and African markets, these markets has seen tough competition from both global and local players.

Also, the deal sizes are very small.

For instance, Temenos too, has seen its licence grow from the Asian markets. APAC contribution to the company has gone up to 30 per cent in CY2011 from 17 per cent in CY2010.

Add to this, there is competition coming from players like TCS, Oracle Financial Services and smaller firms like Infratech, Polaris Financial Technology among others.